Op-ed

Coexistence or Consolidation? Forex Brokers vs. Cryptocurrency Exchanges

Blockchain has ushered in a new tech-revolution on financial markets. Can the Forex and crypto industries coexist peacefully?

Forex was one of the most dominant industries among the retail traders/investors for the last two decades. Now, with the growing popularity of crypto trading, the two industries are approaching a crossroad. It’s time to examine the relationship between forex brokers and crypto exchanges and to try to understand where this is going.

Do forex brokers and crypto-currency exchanges compete?

As cryptocurrency quickly grew in popularity and turned into a veritable hype, Forex brokers didn’t stand idly by. They analyzed the emergence of new tools, quickly adapted to new realities and tried to get their piece of the crypto pie. As the Forex industry was already well-established, adding a few more trading instruments proved not to be difficult.

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When clients on cryptocurrency exchanges trade tokens for other cryptocurrencies or even fiat currencies such as the US dollar or the euro, Forex brokers can take advantage of these trades with CFD contracts.

Ultimately, for an experienced trader, it makes no fundamental difference to speculate on cryptocurrencies or any other asset.

Is there a competition between forex brokers and crypto-currency exchanges?

Definitely. There is a competition for customers who want to trade with crypto assets, and as such, forex brokers are treading on “forbidden territory.”

But an interesting fact is that Forex brokers for crypto trading have to cooperate with crypto-exchanges. To be able to provide trading with cryptocurrencies to their clients, brokers need quotes and the possibility of hedging to minimize risks. Cryptocurrency exchanges have long discovered the profitability of the business and are usually assisting brokers.

Through this cooperation, cryptocurrency exchanges win big clients in the form of Forex brokers and therefore additional profit. And a large pool of Forex traders is a good primary base for cryptocurrency exchanges.

The broker gets the opportunity to add new trading tools to his portfolio, which makes it possible to recruit new clients and expand the toolkit for current ones.

At the same time, of course, there is still a direct competition.

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When a cryptocurrency exchange offers its liquidity to a Forex broker, it indirectly helps a competitor and loses part of its customers, who will instead trade through a broker.

The broker might also lose some of their clients who will choose to trade on the exchanges directly (for example because the broker doesn’t offer the cryptocurrency the client wants or if they want more control over their assets). Also, a Forex broker might not receive new gambling-oriented customers, because they will be attracted to crypto trading pass by Forex alltogether.

How does the cooperation of brokers and exchanges affect customers and the market?

Despite the risk of both sides to lose customers, such a cooperation is still largely profitable for all parties involved. Both brokers and cryptocurrency exchanges will experience a growth in trading volume, client base, and liquidity and most of all, be exposed to a clientele they might not be able to reach otherwise.

And while brokers and exchanges profit from these partnerships, so do the clients.

Users will always have a choice to trade through a broker or directly through an exchange. An exchange can usually offer a wider range of tools and the ability to directly withdraw crypto tokens. While the selection of coins might be smaller through a broker, they can offer a much higher-quality and personalized service.

This competition creates a general increase in the quality of the provided services. Overall, the number of speculative instruments on offer will grow and more experienced traders will appreciate the opportunity to trade with leverage on exchanges.

Conclusion

In the past few years, we became witness to another technological revolution, which was marked by the emergence of the blockchain and cryptocurrencies. We also saw how Forex brokers actively joined the fight for new crypto clients and two powerful industries, cryptoexchanges and the Forex market, have begun a fruitful interaction.

The chance that these industries will continue to exist separately, meeting only in the matter of liquidity, is rather high. At the same time, it’s possible that the border between the two will be erased and the market will see the emergence of “financial multi-harvesters,” which have the possibility to trade cryptocurrencies for real assets and provide trade in currency pairs without delivery.

Denis Kiselev is a FinTech specialist, the creator of the FXTM Invest service, and the former head of the Investment Platform Technology Department of Alpari Group.

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